This may not directly pertain to job search and the question is about tenure review question. I have been on course load release (1 class per semester) over my past few years at institution X. I am on a research grant with another PI and he bought my teaching time out of his grant.

While I am preparing my review documents, my chair has informed me that because I have course release in the past, the department/college expects to see higher research productivity compared to other faculty members who don't have grant. It sounds like the univ is punishing people who have grant??!! I was completely caught off guard and am curious if this is true for other places?

I haven't heard of that but it sounds very reasonable to me, actually. Because that's what the course release is supposed to accomplish—more research. You can't show as much for your teaching as other people can, so you need to show it in terms of research. It's not a punishment. Maybe someone else can chime in with another opinion? The grant itself is of course impressive and can count towards your research "score," I suppose, but OTOH it sounds like your college isn't getting the indirect costs from it (your PI's college is), so it's not like it's even that beneficial to them. Also did you write the grant? Because that should be a factor (i.e. would you be able to win your own again in the future?)

I don't think it's an unreasonable expectation. If you're spending less time teaching, then presumably you're spending more time on the research that you're funded to do, which should enable you to be more productive. I acknowledge that the correlation between time spent on research and productivity is not going to be perfect, but it should be positive.

At my institution faculty have the option to negotiate how much their teaching versus research is "weighted" in tenure review (the weighting must be decided a couple of years in advance of the review, of course, but can be renegotiated as one gets closer). This noted, it doesn't seem odd to me that a faculty member with a course release is expected to show some research accomplishment. That's no different than a sabbatical or other situation giving rise to a course load reduction, barring illness or maternity/paternity leave.

To re-frame your sense of fairness/punishment - would it be fair to expect faculty who teach full loads and have no grants to produce as much research as those faculty with course releases and grants?

I am actually quite surprised you would be caught off guard - I would hope that institutions would weight things accordingly based on loads, course releases, and the like. If you have opted out of teaching, that time that would have been spent on teaching should have been spent on research - thus, you should have a higher productivity overall. I don't think this is punishment at all - it simply reflects where your emphasis has been, which should be weighted and evaluated accordingly in a tenure review process (i.e. if the grant and corresponding course release don't increase your research productivity at all, that is a bad sign….isn't it?).